Buy now, pay later (BNPL) has many drawbacks, one of which is that it may lure you into taking too much debt, which is bad for your credit.
In 2020, a survey found that 37.65% of American citizens have utilized a BNPL service. Since then, the percentage of Americans who have utilized one of these services has risen dramatically, with 55.80% claiming to have done so.
If you haven’t already been urged to lengthen the payment plan on a purchase at the checkout, you will be soon. The BNPL industry is rapidly expanding, but it may be luring customers into making purchases they cannot afford. These installment loans, which are usually accessible without a credit check and are given at the place of purchase, allow you to spread the cost across multiple installments.
Avoid these possible pitfalls to save money if you’re thinking of getting into the trap of BNPL.
How Does The Buy-Now-Pay-Later System Work?
Retailers are more likely to collaborate with certain BNPL suppliers. After pay, for example, collaborates with Nordstrom, Calvin Klein, and Tommy Hilfiger. Clear pay, collaborates with Marks & Spencer, while Klarna has partnered with hundreds of merchants, including Nike, H&M, etc.
Klarna, Clear pay, and After pay offer shopping applications of their own. So, if you want to buy anything online, you can use the retailer’s website to do so – using whichever BNPL provider is available – or through a BNPL application.
BNPL Traps to Avoid
Risk of Ending Up Paying Late Fees
The simplicity of the language is one of the attractions of BNPL, yet the terminologies differ greatly amongst providers. Most BNPL providers use the term no late fees and no interest which is not always true.
For example, if you are unable to pay your fees within ten days of the due date, a BNPL provider can fine you an additional fee.
You Might Trap Yourself into Unneeded Debt
BNPL might trap you into buying expensive things that you don’t need or normally buy. According to a report, 33% of people use the BNPL option to buy necessary things they couldn’t afford, while BNPL traps around 28% of people into buying unnecessary things.
Fintech businesses (financial services businesses), unlike the banking system, are not mandated to guarantee that they assess a consumer’s credit history or capacity to repay throughout the review and approval process. It can soon lead to a financial burden to customers in the long run.
Notably, several of the most significant consumer protection regulations that protect customers from fraudulent loan activities do not apply to BNPL products. Many of these firms aren’t now protected by the truth in lending act, which needs “5 installments” before the law is activated due to the normal 4-installment repayment intervals.
Let’s be clear: BNPL’s promotional materials do not include the words “loan” or “debt,” but that is exactly what these services are, and they must be governed as such. A lack of regulation is a major issue that makes it easy for users to put their financial stability in jeopardy unintentionally. California has officially classified many BNPL arrangements as loans.
Not Providing Enough Time to Pay
Most buy-now-pay-later services need a four-installment plan payment, which might be fairly big if your product is worth several thousand dollars.
It Might Not Help You Improve Your Credit
One of the tempting aspects of BNPL services is that they too will enable consumers with no or bad credit to purchase items on credit. However, they are more likely to harm your credit history than to help it since most customers are unable to pay on time.
While BNPL may provide certain customers with flexibility that might be beneficial during difficult financial circumstances, it also has drawbacks. Many services charge late penalties if you miss a payment, while some charge interest rates if you don’t pay on time. BNPL debt may be handed over to debt collectors or result in a point deduction on a consumer’s credit score if payments are missed.
In the BNPL universe, these consequences are frequent; according to one survey, 72 percent of people who missed BNPL payments had their credit score drop.
Paying for things in installments isn’t a new concept. However, in a world where millions of people are struggling to pay the bills due to the burden of debts, people should resist using these installment options. Consumers must be safeguarded from misuse as long as BNPL exists, just like any other loan.
Hire a bill negotiation service company to help you lower your monthly business or household bills. BillsaverUSA Inc. is a leading bill negotiation provider that can save you money on internet bills, cable bills, and other utility bills. They can also find billing errors in credit reports and help you get refunds.